Europe is working to ramp up the firepower of its bailout fund, top officials said yesterday, as the United States, China and other nations raised the alarm about its debt crisis hurting the world economy.
Financial markets plunged last week on fears that Greece's near-bankruptcy could spread to other euro zone countries, heaping pressure on European policymakers to prevent a repeat of the chaos that swept the world in 2007-2009.
A top IMF official said the European Central Bank was the only player powerful enough to "scare" financial markets and keep the euro zone's debt crisis from further damaging the global economy.
Ahead of a high-stakes meeting later today between IMF chief Christine Lagarde and the finance minister of Greece - where the crisis is now centered - officials were wrestling with how to bolster Europe's banking system and keep the crisis contained.
The IMF said the European Union's bailout fund could not go it alone.
"It is very important that we see a combination of the ECB and the EFSF," said Antonio Borges, the head of the IMF's European department, referring to the European Financial Stability Facility of €440 billion.
"The ECB is the only agent that can really scare the markets," he added - a vital consideration because investors are increasingly skeptical Greece can avoid a default and policymakers can prevent the crisis rolling to other nations.
Analysts say the bailout fund would be far to small if the crisis were to spread beyond Greece, Portugal and Ireland to hit the much larger economies of Italy and Spain.
Germany stands opposed to chipping in more to help nations it sees as profligate and the focus has now turned on ways to leverage existing bailout funds, possibly through the ECB.
Deutsche Bank AG Chief Executive Officer Josef Ackermann said it was "crucially important" for euro area governments to implement a July 21 agreement to beef up the rescue fund for their common currency.
Mr Ackermann, speaking as the chairman of the Institute of International Finance at the group's annual meeting in Washington today, called upon euro area governments to quickly approve the EFSF)as well as the measures to enhance greater economic policies discipline.
"The euro is an essential and stable pillar of the international monetary system and has brought stability and growth to its members," Mr Ackermann said. "Its central role in the global monetary system makes it all the more important that any doubt about the workability of its institutional foundations be removed."
Spurred on by the worst week on stock markets in two years, warnings to European leaders grew more strident as the three-day IMF/World Bank meetings progressed. “There was very clear recognition on the part of ministers... of the gravity of the situation we are in,” Tharman Shanmugaratnam, the chairman of the IMF international monetary and financial committee, said in a closing press conference with the IMF’s managing director Christine Lagarde.
“We face a confluence of sovereign debt and banking risks, with the epicentre of that being in the euro area.”
Ms Lagarde said the IMF was “ready and it will deliver on any type of resources necessary and available to all members... By resources, I mean everything that the Fund can deliver, from policy advice, from being the trusted advisor and the facilitator, to organising facilities that are needed.”
The European Union's top economic official, Olli Rehn, said as soon as the region's governments confirm new powers for their €440 billion fund, known as the EFSF, attention will turn to how to get more impact from the existing money.
"We need to find a mechanism where we can turn one euro in the EFSF into five, but there is no decision on how we could do that yet," another senior European official said on condition of anonymity.
The rescue fund would need to be at least €2 trillion to safeguard Italy and Spain if the crisis were to spread, financial analysts estimate.
The United States and other nations have urged Europe to leverage up the fund, possibly with support from the European Central Bank.
But officials from the ECB and from Germany, the region's paymaster, remained wary of using the central bank, which has a strict mandate to pursue low inflation.
"We should not think of leveraging a public pot of funds as a free lunch," said ECB Governing Council member Patrick Honohan.
Nonetheless, arming the euro zone with a bigger warchest to lend to governments or shore up banks was the focus of top finance officials from around the globe.
The sovereign debt crisis threatens to throw the euro zone into recession and has placed a troubling drag on an already slow US economy. It could come to weigh on emerging economies too.
"Brazil's experience with past crises suggests you have to confront the problems in a fast, consistent manner," said Brazilian central bank chief Alexandre Tombini.
"The longer it takes, the higher the cost, the more contagion spreads. You have to act with overwhelming force."
European officials were scrambling to put in place a comprehensive crisis-fighting plan by the time leaders from the Group of 20 nations meet in France in early November.
Greece is at the epicentre of the crisis but it has threatened to spread to several other euro zone countries. Italy, the third-biggest economy in the currency bloc, has also struggled to retain investor confidence, but Italian Economy Minister Giulio Tremonti said on Saturday its financial house was "in order."
US Treasury chief Timothy Geithner, in his most explicit warnings to date, said the ECB should take a more central role in fighting the crisis. "The threat of cascading default, bank runs, and catastrophic risk must be taken off the table," he said.
Agencies